Scoring McCain’s Tax Proposals

By Len Burman and Greg Leiserson

Senator McCain wants to make government much, much smaller.  His specifics on how are sketchy—eliminate earmarks, programs that don’t work, waste… But his tax day speech gives us an idea of how much he wants to shrink the government. A lot. And even more than when we last blogged on the subject back in February.

He proposes to make President Bush’s tax cuts permanent, repeal the AMT, double the dependent exemption, raise the estate tax exemption and lower its rate, make permanent the research credit, and suspend federal gas taxes this summer. He’d also cut the top corporate tax rate from 35 to 25 percent and allow companies to deduct machinery and equipment immediately, rather than amortizing them. He also plans to close corporate tax loopholes worth $30 billion per year.

Even with the loophole closers, these proposals would reduce federal revenues by about $5.7 trillion over ten years if they could be enacted immediately.  Under a more realistic assumption that they don’t take effect until October 2009, the cost would be about $5.4 trillion. (Details of our calculations are in TPC table T08-0071.)

Cuts this size would pare government back to levels not seen since the Eisenhower administration. In FY 2012, tax revenues would be reduced by about $550 billion compared with current law (with the tax cuts expired). That is roughly equal to CBO’s baseline projection for all nondefense discretionary spending.

McCain’s proposal is $300 billion bigger than all of President Bush’s FY2012 tax cut proposals. Tax revenues would be about 16.8 percent of GDP. By comparison, spending this year is about 20 percent of GDP.

We haven’t mentioned the optional simple alternative tax because not enough details have been made public to estimate its effect. We do know that it would have two rates and a high standard deduction.  Taxpayers could elect to pay it or their liability under the old income tax.  While vague, it sounds like a proposal made by Senator Thompson, which would have reduced federal tax revenues by even more than the basic McCain proposal—about $6.6 trillion over 10 years ($6.3 trillion starting in FY2010). Adding the cost of the corporate tax cuts, the total comes to $8 trillion over 10 years ($7.6 trillion starting in FY10). That scenario would reduce federal tax revenues by $780 billion in FY2012—$140 billion more than the entire defense budget in that year. Our analysis of the Thompson tax plan is available here

These estimates make one thing clear. Senator McCain plans a radical downsizing of government. Slashing pork, earmarks, and underperforming programs would offset only a fraction of the revenues. Cuts the size of those he proposes will require slashing discretionary spending and entitlements, and probably even reining in defense spending. Small wonder he has backed away from his earlier pledge to balance the budget—meaning that these tax cuts, like the ones signed by President Bush, will be paid for by our children.